In case of a contract for the “sale of goods”, the delivery of the goods involved is a primary condition. On the other hand, in case of a contract for the “work, labour & materials”, the primary condition of the contract is the application of the labour or skill, and the delivery of the goods involved is just a secondary condition.
Example:- “A” enters into contact with “B” a renowned painter, to paint a picture for an agreed price. the material required for painting was agreed to be supplied by “A”.
This contract will be treated as contract for “work labour” and not a contract for the “sale of goods”.
The Supreme Court in “Commissioner of sales tax(MP) vs Purshotam Premji” has summarised the distinction between a contract for work or service and contract for sale as follows:-
– In case of a “contract for work & service”, there is the person performing work or rendering service an dno property in thing is produced as a whole.
– In case of a “contract for sale”, the thing produced on a whole has the individual existence as the sole property.
– Hence, the delivery line between the two is not very clear. It has to be judged on the facts & circumstances of the case.
– Hence, in order to determine the nature of contract, one must see the end o fthe transaction. If the substance of the contract is skill & labour, then the contract is essentially of work & material, (passing of property is just ancillary).
POSITION OF WORKS CONTRACT
Before 46th Constitutional Amendment:
Levy of sales tax on the sale of goods involved in the execution of the works contract was held to be unconstitutional in Gannon Dunkerley case.
After 46th Constitutional Amendment
States have the power to bifurcate the contract and levy sales tax on the value of the material involved in the execution of the works contract. Now, by legal fiction provided in clause (29A)(b) of article 366, the works contract becomes separable & divisible, one for the materials and the other for services and for the work done.
Now, the distinction between contract for sale of goods and contract for work has almost diminished in the matters of composite contract.
Treatment under GST
According to section 2(119) of CGST Act 2017, works contract means a contract, wherein transfer of property in goods is involved in the execution o fsuch contract and includes contract for building, construction, erection, installation, modification, repair, alteration or commissioning, etc. of any immovable property.
The contracts which are not for immovable property, provisions relating to “Composite Supply” or “Mixed Supply” will be applicable and taxed accordingly.
Composite Supply [Section 2(30)]: – If the goods and services supplied together are naturally bundled, then it is known as composite supply. Example : It is smarter and more convenient to sell a torch and battery together. Here tax is charged @ tax applicable on principle supply of goods to all supply.
Mixed Supply[Section 2(74)] :- If goods and services supplied together are not naturally bundled together, then such a supply is known as mixed supply. Example – It is not necessary to sell pastry an dcold drinks together. Here tax is charged at highest tax applicable on supply.
RELEVANT CASE LAWS
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.1959 SCR 379
Commr. of Commercial Taxes v. Hindustan Aeronautics Ltd.(1972) 1 SCC 395 : AIR 1972 SC 744
Facts: The respondent was a company which dealt in the construction of railway coaches. An order was placed by the railway board to the respondent assessee of the manufacture and supply of certain coaches. The Commercial Tax Officer, by assessment order dated March 28, 1964, in respect of the assessment year 1958-59, included the turnover in respect of the supply of these coaches. The Sales Tax Officer rejected the contention of the assessee that there was no sale involved in the works of the contract. In appeal, the Deputy Commissioner of Commercial Taxes confirmed the order. The assessee then made an appeal to the High Court of Mysore under Section 24(1) of the Mysore Sales Tax Act read with Section 9(3) of the Central Sales-tax Act. The High Court allowed the appeal and set aside the order including the turnover relating to the construction of railway coaches. Hence, an appeal was preferred before the Supreme Court.
Issue: Whether there was a sale of railway coaches liable to sales tax or only a works contract?
Judgement: The Court discussed the terms and conditions of the contract and observed the following points: —-The Railway books capacity of the assessee for the purpose of construction of railway coaches.
-Advance on account is made to the extent of 90% of the value of the material on the production of a certificate by the inspecting authority.
-The material used for the construction of coaches before their use is the property of the Railway.
-It seems that there is no possibility of any other material being used for the construction as is borne out from the report written by the Commercial Tax Officer.
-As far as the coaches of models 407 and 408 are concerned, the wheelsets and underframes are supplied free of cost.
-In the order the words used are “manufacture and supply of the following coaches”.
The Court said that the answer to the question whether it is a works contract or is a contract of sale depends upon the construction of the terms of the contract in the light of the surrounding circumstances.
The Court further said that on these facts it seems to us that it is a pure works contract. They are unable to agree that when all the material used in the construction of a coach belongs to the Railways there can be any sale of the coach itself. The difference between the price of a coach and the cost of material can only be the cost of services rendered by the assessee. The Court dismissed the appeal with costs.
Sentinel Rolling Shutters and Engg. Co. (P) Ltd. v. CST(1978) 4 SCC 260 : AIR 1978 SC 545
Facts: The appellant, a private limited company, engaged in engineering, contracting, manufacturing, and fabrication, entered a contract with M/s. C.M. Shah & Co. (P) Ltd. to fabricate, supply, and install Sentinel’s Pull and Push type and reduction Gear type rolling shutters. The contract comprised printed terms and specific special conditions, including a payment schedule of 25% advance, 65% on delivery, and the remaining 10% post-erection and satisfaction of the company.The appellant fulfilled the contract, manufacturing and installing the rolling shutters as per specifications. The appellant sought clarification from the Commissioner of Sales Tax regarding the taxability of contract payments.The Deputy Commissioner deemed the contract as a sale subject to sales tax. The Sales Tax Tribunal upheld this decision, viewing the contract as composite, involving both sales and installation. The High Court concurred with the decision of the Tribunal hence an appeal was filed before the Supreme Court.
Issue: Whether a particular contract is a contract of sale or a contract of work and labour?
Judgement: The Court’s observations regarding the nature of the contract delineate three potential forms that such agreements may take.
-Firstly, contracts may encompass both work and material supply, constituting composite contracts.
-Secondly, contracts for work without the sale of goods are distinct.
-Finally, contracts for goods with incidental work also exist.
Court said that while the first type is divisible, the latter two types present complexities in classification. In the case examined, the contract involves fabrication, supply, erection, and installation of rolling shutters. The contract integrates fabrication, supply, erection, and installation without recognizing a dichotomy in pricing. The Court noted that a rolling shutter is not a complete unit until component parts are assembled and installed on-site.
Thus, the execution of the contract is contingent upon the erection and installation of the rolling shutter.Payment terms further emphasize the inseparability of fabrication, supply, erection, and installation. The Court held that the contract was a contract for work and labour and not a contract for sale and held a decision in favour of assessee not the Revenue.
M/s. Larsen & Toubro Limited V. State of Karnataka(2014) 1 SCC 708
Facts: The case involves a dispute regarding the classification of contracts entered into by Larsen and Toubro (L&T) for property development projects. On 19th October 1995, L&T entered into a development agreement with Dinesh Ranka, who was the owner of the land, to construct a multi-storeyed apartment complex on Dinesh Ranka’s land in Bangalore. The agreement stipulated that Dinesh Ranka would contribute the land, and L&T would undertake construction.After completion, ownership would be divided, with 25% for Ranka and 75% for L&T. Deputy Commissioner called upon L&T to furnish the details of the development project. Deputy Commissioner issued a show cause notice on L&T stating that it was liable to tax according to the decision of this Court in Raheja Development. The L&T inter alia submitted that the development agreement was not a works contract per se on account of the reasons: (a) the agreement was to develop and market flats to customers; (b) the intent and purpose of the agreement were to develop the property by the petitioners on the one hand and the land owner on the other; (c) the construction and development of the said land involved no monetary consideration; and (d) the only consideration was that upon the completion of the entire project, L&T would be entitled to 75 per cent of the same.
Initially challenging demands via a writ petition, L&T later filed a petition before the Karnataka High Court.The larger legal question centers on the classification of these agreements under the Karnataka Sales Tax Act, 1957.
Issue: Whether the judgment of the Division bench in the Raheja Development Corporation case is correct?
Whether the State Government was entitled to levy VAT on the sale of flats?
Judgement: When an agreement is entered into between the promoter and the flat purchaser for constructing a flat and eventually selling the flat, the said activity is considered a works contract and the conditions of such a contract are satisfied in this case. Goods in some other form imply that the goods have ceased to be chattels or movables and become attached to the earth. Therefore goods which have by incorporation become part of immovable property are deemed as goods.
The Supreme Court acknowledged the contentions raised by L&T regarding the nature of the agreement and the distinction between works contracts and contracts for sale of goods.
However, it found that the activity undertaken by L&T qualifies as a works contract, as it involves construction activities and the transfer of property rights.
The Court also emphasized the constitutional limitations on the taxing power of the State in relation to works contracts, as defined under Article 366(29-A). The larger Bench of the apex court held that any agreement for selling immovable property entered into before the construction would fall within the purview of the term ‘works contract’, allowing state governments the power to impose value-added tax (VAT) on such contracts. Thus, it upheld the tax liability on L&T for the deemed sale of goods used in the construction activities.
Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi(1978) 4 SCC 36 & (1980) 2 SCR 650
Facts: The Sales Tax Authorities rejected the appellant’s contention that the service of meals to non-residents in the hotel’s restaurant did not constitute a sale of foodstuffs. The High Court ruled in favor of the appellant on the first question and against it on the second. The appellant’s position in law was assimilable to that of an innkeeper, and the principle was extended to the service of food at eating places or restaurants. The court had previously adopted the English law concept that there is no sale when food and drink are supplied to guests residing in the hotel. However, other courts had made observations to the contrary.
Issue: Whether the service of meals by the appellant in the restaurant constitutes a sale of foodstuffs for non-residents?
Judgement: The appellant’s position in law was assimilable to that of an innkeeper, and the principle was extended to the service of food at eating places or restaurants. The view taken by the English law found acceptance on American soil, and after some desultory dissent initially in certain states it very soon became firmly established as the general view of the law. The court had previously adopted the English law concept that there is no sale when food and drink are supplied to guests residing in the hotel. However, other courts had made observations to the contrary. In the circumstances of the case, the court held that the service of meals to visitors in the restaurant of the appellant is not taxable under the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union territory of Delhi, and this is so whether a charge is imposed for the meal as a whole or according to the dishes separately ordered.
The service of meals to visitors in the restaurant of the appellant is not taxable under the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union territory of Delhi, and this is so whether a charge is imposed for the meal as a whole or according to the dishes separately ordered.
